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Economic rationality

Economic rationality

We usually think about rationality as being sensible or reasonable. For economists, rationality means when you make a choice, you will choose the thing you like best. Economic rationality accepts that people will act in a relatively predictable way.

Economists use this assumption to build economic models or theories. A famous theory is the law of supply and demand which states that if something costs more, rational people will probably want to buy less of it and sell more of it.

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'Rational choice theory' and 'Bounded rationality theory'

  • Rational choice theory thinks of people as economic super-men and women, also known as homo economicus. Economists use this theory to think about what 'economic man' would do, then add up the actions of billions of people to make models about how the economy works.
  • Bounded rationality theory looks at the ways we don't or can't act like homo economicus. It sees people as rational but limited by the information they possess and their ability to process that information.

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